Flying into trouble

A blog written for the Guardian’s Comment Is Free website about the rising cost of jet fuel and its impact on the aviation industry…

For all the talk about how home heating and petrol pump prices are fast rising, there seems to be remarkably little comment – given our love affair with flying – about how runaway oil prices are hurting the airline industry. Within the past few weeks, a number of airlines have gone out of business – this weekend saw Eos, the business class-only airline operating routes between Stansted and the US, join the growing list. Eos follows its direct competitor Maxjet, as well as Oasis (which claimed it was the first long-haul, low-cost carrier when it began flying Hong Kong-London in late 2006 for as little as £75 each way), and four US-based carriers: ATA Airlines, Aloha, Skybus and Champion Air.

Not all of these failures can be attributed to rising jet fuel prices alone – the economic slowdown, credit crunch, and weak dollar are taking their toll, too – but it’s the sky-high operating costs that have tipped most of them over the edge. It is now surely just a question of when, not if, one or more of the well-known carriers hits serious turbulence by going bust, or turning to consolidations and mergers for protection, as typified by the recent Northwest/Delta lovefest as well as persistent talk – despite a denial from its president this weekend – of Continental hooking up with United and/or US Airways.

You only need to look at the price of jet fuel today compared to this time last year to see what’s causing the squeeze. According to the International Air Transport Association’s fuel price monitor, the price has increased 78.2% in the past 12 months. (That’s a global average: in Europe prices have increased by 84%, making it the world’s most costly region to buy jet fuel.) In the past month alone, it has risen 8.8%. IATA estimates that this rise has added $61bn to the industry’s total fuel bill for 2008 compared to 2007. And today we have the president of Opec talking about oil prices hitting $200 a barrel. Something clearly has to give, especially for an industry that famously runs on such tight margins.

What makes this all the more remarkable is that most airlines hedge their fuel costs, meaning that they are buying the fuel they need sometimes up to 18 months ahead of when they will actually need to consume it. Therefore, after “enjoying” a period in which they were partly shielded from the price spikes, many airlines are only now having to absorb the truly vertiginous fuel cost rises seen over the past year.

As with all fuel-dependent industries, the airlines now have to operate on an almost week-by-week basis. Just step back to the end of March and consider how low-cost carrier investors were spooked by the news of easyJet’s profits warning. What unsettled them most was the thought that easyJet was basing its projections on jet fuel being priced at $1,000 a tonne – a horrifying thought for investors. Back in February, both easyJet and Ryanair were using the price of $840 a tonne in their fiscal projections. However, today the price stands at $1,145 a tonne (about $3.46 a gallon), and with pressures such as the Grangemouth strike, continued unrest in Nigeria and increasing demand from Asia, the rises show no sign of relenting.

So what does this mean for passengers? Well, we may come to remember summer 2008 as the last time we got to fly abroad for our holidays “on the cheap”. The decade-long era of our holiday flight costing as little as one-night’s stay in a hotel, or less, is surely at an end. EasyJet, for example, says that it has hedged 40% of its summer 2008 fuel requirements at $750 a tonne, which means it still has a few months to go before it gets truly clobbered by the price rises. A month ago it predicted that if fuel reached $1,000 a tonne it would equate to adding $45m to its overall fuel bill for the second half of 2008. Given that the price has already far surpassed this symbolic mark, then it is clear that the costs are soon going to have to passed on to passengers in the form of hefty ticket price increases, or further spurious check-in and luggage charges.

Quite how high the cost of flying is likely to go no one seems too keen to say, but when you consider that an Airbus A320 – a favourite of the low-cost carriers – consumes about six gallons of jet fuel per seat per hour, you can begin to see how current price rises are going to impact on how much we currently pay to fly.

Many airlines, despite the threat to their competitiveness, have already bumped up their fuel surcharges – United doubled its own surcharge a fortnight ago – but now we are seeing some airlines admitting that they are about to imminently raise their overall ticket prices. Just today, for example, Qantas said it was going to add 3% to its prices from the beginning of May to cover the cost of fuel. As has already been seen with home heating and driving costs, it is presumably worth bracing yourself for double-digit rises in the coming months. After that, who knows?

This is all good news for environmentalists, of course. I, like many others, have long argued that the cost of flying needs to reflect its environmental cost and by doing so curb runaway demand, but I readily admit I never imagined that oil prices would bring about the price rises required in such short order – certainly years ahead of any likely emissions-trading costs, or “green” taxes. (Just imagine how much jet fuel would cost today if it was, like other fuel, actually subject to fuel duty and VAT, but that’s another debate altogether.) The free marketeers will be thrilled: the market, rather than the regulators, got to decide first.

The big question now is will market conditions get to decide the fate of the proposed third runway at Heathrow, too?